The Chinese Economy Is More Than Ever Caught in the Trap of Xi Jinping’s Zero-COVID.
This is how a wrong strategy followed inflexibly can plummet an entire economy.
Mr. Ye has been working hard this summer to try to make up for losses in his Shanghai stores, in the wake of the lifting of the brutal lockdown of China's largest metropolis. But this owner of a ready-to-wear chain is already resigned to the fall of 2022: “I'm exhausted, we'll lose money this year. The issue is survival,” says the 35-year-old entrepreneur.
Despite the lifting of the most severe restrictions, the relentless zero-COVID strategy in which President Xi Jinping got himself stuck still hangs like a sword of Damocles over the world's second-largest economy. This strategy, which has demonstrated its limits, is undermining Beijing's recovery efforts and is plunging the morale of the middle classes and the horizon of the Asian giant, into an increasingly troubled geopolitical context.
“Consumption is too low. When people don't feel safe, they don't spend. They don't go out anymore for fear of anti-COVID restrictions,” Ye summarized.
Most Chinese live permanently at the mercy of a quarantine, decreed by big data, if they have crossed a contact case or visited a “risk zone” during their daily peregrinations, in a shopping mall or a school. At any time, their neighborhood, or even their entire city, can be confined, if a handful of cases are detected, as in the metropolises of Chengdu or Shenzhen in recent weeks.
On the eve of the Party Congress that will open on October 16, 2022, President Xi Jinping has set up the fight against omicron as a dogma, with his eyes riveted on stability, while he is running for a third term out of the ordinary, at the risk of bogging down Chinese growth.
The statistical indicators for August 2022 show a timid recovery of activity, after the air pocket of spring 2022, but insufficient to restart the machine and keep the official annual target of “about 5.5% growth.” Industrial production rose by 4.2% in August 2022 year-on-year, 0.2 points higher than in July, and retail sales also picked up some steam, rising to 5.4%, 2.7 points higher than in the previous month, according to figures released on 16 September 2022. Exports were up 8.6%.
But this rebound observed in China remains laborious and does not clear the horizon, even recognize the “official” economists. “The international environment remains complicated and the fundamentals of the domestic economy are not strong,” admitted the National Bureau of Statistics (NBS). If even China can't afford to manipulate the numbers, then things aren't going well ...
Heightened tensions with the West since the war in Ukraine and the threat of new U.S. technology sanctions are weighing on investors and the outlook, signaling a new chapter for the behemoth after decades of takeoff.
China is facing an unprecedented low since the era of opening up and reform (launched in the 1980s). The anti-epidemic policy has come at a huge cost and the economy will not recover as many had hoped, as it is structurally damaged. The relentless zero-COVID strategy is costing up to two points of GDP growth in China.
More seriously, the anti-epidemic imperative has acted as a revelation of structural weaknesses, exacerbating them by the ricochet effect. And it is neutralizing recovery efforts, to the point of risking dragging the world's factory into a negative spiral. For example, the confinements have exacerbated a long-standing real estate crisis, symbolized by the woes of developer Evergrande, also eating into the revenues of already heavily indebted local governments and in turn, undermining their ability to sustain activity. Real estate sales fell in August 2022, confirming the cautiousness of buyers since 2021, some of whom are on strike with their monthly loan repayments.
This vicious circle is undermining the effectiveness of the old tricks used once again by the communist regime to boost activity via a vast infrastructure plan. Thus, investment in this sector should increase by 18% over the year to meet the annual GDP growth target, but its growth did not exceed 7.4% in the first half of 2022.
In a recent note, Natixis points out that:
“Margins for maneuver are much more limited than in the past. Falling tax revenues are constraining the government's ability to invest in infrastructure projects.”
While the People's Bank of China is increasingly accommodating to support activity, in contrast to its Western counterparts, it also faces constraints. A continued decline of the yuan against the US dollar will give a slight boost to exports, but risks hastening capital flight and also scratching Beijing's image during a geopolitical sequence where Xi Jinping wants to project an image of power.
While China can still count on the continued expansion of its urban middle classes and the dynamism of its entrepreneurs, uncertainty about the timing of the lifting of epidemic constraints is undermining the horizon. “Growth will continue to be weak in 2022 and beyond,” Natixis predicts, while the IMF has lowered its annual forecast to 3.3%. This is the lowest level since Mao, except for the low point in 2020, the year of the outbreak of COVID.
Even more worrying for Xi Jinping and the CCP, some people are now losing hope for the future in China. Many young Chinese have lost the enthusiasm to start businesses. The China of the future will not be the one that many had imagined. The return to reality will be even harder!
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